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  Gary Nagurka



The first step in the home buying process is to find out what price home you can afford to buy. The easiest way to do this is to talk to a mortgage broker or loan agent and ask him or her to prequalify you for a mortgage.

Prequalification is an informal procedure. It requires a brief meeting with a mortgage person. He or she will ask you about your financial capabilities -- your income, your savings and your debts. Then he or she will tell you what price home you can afford to buy.

Prequalification is a no-strings-attached procedure. Buyers are usually under no obligation to use the person who prequalified them when they apply for a mortgage.

Also, the prequalifying lender or mortgage broker is under no obligation to grant the buyers a loan. Most prequalification letters state that the buyers appear to be qualified for a certain loan amount. There's usually a disclaimer to protect the lender or broker in case the buyers fail to qualify.

Before a lender will actually loan money, the buyers must complete a loan application. This must usually include written verification of income, debts, and funds for the down payment and closing costs. The buyers' credit is checked. An appraisal and a satisfactory title search of the property are also required.

Depending on the buyers and the property involved, the lender might require additional documentation before approving a mortgage. Frequently loans are approved with "subject to" conditions. For example, the lender might want marginally qualified buyers to pay off a charge account balance before closing.

It's common for today's homebuyers to get prequalified before they make an offer to buy a home. A prequalification letter is better than nothing -- at least it indicates that the buyers have taken the first step toward lining up a mortgage. But, don't let it give you a false sense of security.

Most purchase contracts include a financing contingency. This protects the buyers. If the buyers try to get a loan, but can't, they don't have to complete the purchase. In this case, their deposit is usually returned to them.

First Time Tip: There are steps you can take to add muscle to a prequalification letter. Buyers should ask their mortgage person to run a credit check. Bad credit is one reason loans are denied. Your prequalification letter should state that your credit was checked and was acceptable to the lender.

Sellers who receive a purchase offer accompanied by a prequalification letter, with no mention of a credit check, should include a provision in a counteroffer that requires the buyers to provide proof of satisfactory credit review within a few days after acceptance of the contract.

Sellers should also require the buyers to submit a completed loan application to a lender within several days of acceptance. Just because the buyers' credit was checked doesn't mean that the loan approval process has begun. The approval process doesn't start until the buyers complete a loan application and submit it to their lender.

Savvy buyers are getting preapproved, not just prequalified, for the loan they'll need even before they find a home they want to buy. This requires submitting a loan application and all the supporting financing documentation. The buyers are then approved for a mortgage, subject to a satisfactory property appraisal and title review.

The Closing: Preapproved buyers are in a great bargaining position because sellers can feel confident about their credit-worthiness. A prequalification letter says the buyers appear OK financially. Preapproval from a lender is the next best thing to a loan commitment.